Interest on federal student loans increased on July 1. Here is what you need to know

College education has just gotten a bit more expensive for students (and parents) considering taking out federal loans this fall. On July 1, 2021, the Federal Reserve raised interest rates for the 2021-2022 academic year by almost a percentage point:

• 2.75% to 3.73% for direct subsidized and direct unsubsidized loans for undergraduate students.
• 4.3% to 5.28% for direct unsubsidized loans for graduate or professional students.
• 5.3% to 6.28% for Direct Plus loans for parents, graduate students or professionals.

This increase comes after record rates from the previous year, just like the coronavirus pandemic has begun. The table below shows the rates and fees for the upcoming school year.

As you navigate additional education costs, here are a few more things to know about federal student loans.

Why are interest rates rising?

Since 2013, Congress has set federal student loan interest rates based on the government’s annual sale of 10-year treasury bills. The US Treasury sells notes to investors to borrow the money needed to close the gap between the tax revenue it collects and the amount it spends to raise capital and refinance federal debt.

Each May, the highest bid in the T-Note auction represents the return investors will receive over the next 10 years. The offer also helps investors assess economic growth, and the student loan interest rate is directly correlated with national forecasts. A slow economy lowers interest rates and makes it cheaper to borrow money for college, while a growing economy pushes rates up and makes borrowing more expensive.

When the pandemic began in early 2020, economic growth slowed and federal interest rates fell to an all-time low of 2.75%. This year the Sale of treasury billsThe high yield of 1.68% was almost a percentage point (0.98%) higher than the previous year, resulting in an increase in the lending rate.

Effects of the rate hike on students and parents

A 1 percentage point increase in the rate translates into a few extra dollars per month in payments on a typical federal loan. The greatest impact will be on the overall accrued interest of a loan. In particular, parents and graduate students who borrow through the Plus Loan might feel additional pressure when withdrawing money for themselves or for their children’s education. This is because the Plus loan has a higher interest rate than other types of federal student loans.

For example, let’s say a parent borrows $ 10,000 with a Plus loan for a son’s second year 2021. Excluding set-up costs, it’s about $ 5 more per month and $ 587 more in interest over 10 years compared to the same loan taken out in 2020. The Plus loan also allows parents and graduate students to borrow for various expenses, including attendance fees. ; room and board; tuition and fees; and allowances for living expenses. Of course, early repayment of the loan would lead to a drop in overall interest.

Choose federal or private student loans

The interest rates we’ve discussed so far only apply to federal student loans. The other option is to take out a loan from a private lender. Unlike government-backed financing, private lenders use a risk-based approach to setting student loan terms and interest rates, which can include your credit history and rating, income, existing debt, and if you have a co-signer.

Depending on these factors, you can find a private loan with a lower fixed interest rate. Keep in mind, however, that private loans do not necessarily offer the same secured protections as federal loans, including:

• Reimbursement based on income: Your loan may be eligible for up to eight repayment options depending on how much you owe and your income after graduation. You can also extend the repayment period from 10 years to 30 years if lower payments are within your budget.
• Debt forgiveness: There are a few avenues to debt cancellation for federal loans. If you have an income-based repayment plan, the government can write off the remaining loan balance that you have paid off for 20 to 25 years. Many federal loans are also repayable if you work in education, nonprofit organizations, or the public service. You can read more about the Federal Loan Exemption on the Federal student aid website.
• Difficulty options: Federal borrowers are eligible for forbearance or deferral of student loans in the event of job loss, illness, injury, return to school, or national emergency relief, such as COVID-19 .

How COVID-19 relief factors fit into the equation

You might be wondering why interest rates are rising while the United States is still struggling with a pandemic. When asked about the rate hike, a representative from the US Department of Education declined to comment but directed us to the Federal Student Aid web pages, including Interest rate for new direct loans and a retailer page how federal interest rates are calculated.

Although interest rates rose this month, the DOE extended the break in payments and interest on all federal loans and collections on overdue loans until at least September 30, 2021.

Last March, the DOE expanded its relief efforts by offering the same zero-interest break to 1.14 million borrowers whose loans are in arrears under the federal family education loan program. Between 1965 and 2010, the FFEL program insured federal student loans from private lenders, including Stafford Loans, Unsubsidized Stafford Loans, Federal Plus Loans, and Federal Consolidation Loans. While some of these loans remain private, others are held by the DOE after being transferred to the government due to default, or were purchased by the government during the 2008 financial crisis. This relief is retroactive to March 13, 2020, the DOE said in a Press release and protect more than 800,000 borrowers whose tax refunds were at risk of being seized to pay off delinquent student loans. Additionally, borrowers whose tax refunds have been foreclosed or whose wages have been foreclosed within the past year will automatically receive refunds.

If you are unsure whether you have a FFEL loan, you can call the Federal Student Aid Helpline (1-800-4-FED-AID) or connect to the FSA website with your FSA ID to find out who is handling your loan.